The Revolution In Radio

Bill and Rebecca Goldsmith are making a living from an idea that would probably get you laughed out of business school: running an Internet radio station commercial free. From their home in Paradise, Calif., in the foothills of the Sierra Nevada, they operate Radioparadise.com, a format-busting station that spins a tasteful mix of music ranging from the Beatles to Norah Jones to the Strokes. Fewer than 5,000 listeners tune in during peak times, but fans like it so much, they sent the couple $120,000 in contributions last year, covering the cost of bandwidth, song royalties and other expenses and leaving enough to support a "comfortable lifestyle," says Bill Goldsmith, who quit a 30-year career in FM radio to run and DJ his homegrown version.

If you can't bear another spin of Britney Spears, you're one of the reasons that stations like Radioparadise are beginning to prosper and investors are again flocking to another alternative to the AM/FM dial: satellite radio. After years of unmet promise, online stations, along with satellite offerings like Sirius and XM Satellite Radio, are building audiences even as regular radio struggles through a decade-long slump (time spent listening is down 14% since 1994, according to the ratings firm Arbitron). Critics say industry consolidation has turned AM/FM stations into McRadio: nationally uniform, repetitive and clogged more than ever with ads and promos. But scores of high-quality alternatives are now competing for your ears (and dollars).

Just a few years ago, online radio heads were mainly tech geeks willing to put up with patchy, low-quality sound. These days about 19 million people listen to online radio at least once a week, up from 7 million in 2000, according to Arbitron. Online listenership is growing at an average 43% a year as more people get broadband connections at home and tune in for content that's unavailable or in short supply on commercial stations, from blues to folk to Al Franken's new liberal Air America network, which is broadcast in just a few markets on the AM/FM dial but was streamed 2 million times in its first week, according to its exclusive webcaster, RealNetworks. "People are fed up with terrestrial radio," says Dave Goldberg, who oversees Yahoo's music site and radio network, Launchcast, which draws 1 million listeners a week.

For now, it's the satellite guys, together claiming around 2 million subscribers, who are drawing Wall Street's attention. Though their stock prices had plummeted over concerns that they might run out of cash, their shares have soared in the past year. XM is up 379%; Sirius, 491%. Analyst April Horace of Janco Partners in Denver predicts that within five years 16 million Americans will be listening to satellite radio. She says the market would explode if a popular shock jock like Howard Stern were to defect with his 15 million listeners, a prospect that looked more likely last week after six traditional stations dropped his show following an FCC proposal to fine their corporate parent, Clear Channel Communications, $495,000 for airing his "indecent" content.

Satellite broadcasters use a pay-radio model, beaming dozens of channels coast to coast commercial free, with original programming such as comedy and kids' shows. Financially backed in part by automakers, the satellite firms charge between $10 and $13 a month, mainly targeting car-radio users. Increasingly, though, listeners are buying portable tuners for their homes. To neutralize a key AM/FM advantage, both satellite broadcasters have started to provide traffic and weather updates in select markets.

So far, digital radio's growth isn't hurting big radio empires such as Clear Channel. With 1,213 stations and roughly a 30% ratings share in markets such as Phoenix, Ariz., and Milwaukee, Wis., Clear Channel had a record 2003: revenues of $8.9 billion and a net income of $1.1 billion. But listeners are clearly spending less time with terrestrial radio. One cause may simply be more media competition, from DVDs to video games to an expanding universe of digital TV. But critics of the radio industry say consolidation is partly to blame too. They claim Clear Channel and other big groups have ruined the airwaves by homogenizing song lists, politicizing the dial with conservative talk and sucking out local flavor with voice-tracking technology, which enables DJs to sound like local talent even if they're a thousand miles away. Clear Channel contends that its cost-cutting measures have saved hundreds of stations from bankruptcy and that it's the programming's popularity, reflected in ratings, that ultimately drives the business.

Nonetheless, teenagers and young adults are increasingly going online to find new music (not just file-sharing networks), particularly alternative content that rarely gets airplay on the commercial FM dial. About 13% of Americans ages 12 to 24 now listen to online radio on a weekly basis, up from 6% of that age group in 2001, according to Edison Media Research/Arbitron. With 185 stations, AOL's radio network, which, like TIME, is part of Time Warner, draws a weekly listenership of 1.5 million (by that measure, Arbitron notes, it's the nation's largest online network). Advertising remains tiny, but that may change. Ronning Lipset, an upstart Internet-radio ad firm in New York City, recently started packaging AOL, Live365.com, MSN and Yahoo into a kind of national network, which has a combined audience of at least 250,000 listeners in a quarter hour, the minimum needed to appeal to national-media planners. The firm says the networks will start running audio spots from national advertisers in May.